("2nd UPDATE: Wells Fargo Execs Boast Of Stability, Less Risk," published at 5:04 p.m. EDT, and previous versions of the article published at 9:23 a.m. EDT and 12:54 p.m. EDT, misspelled the name of Wells Fargo CEO John Stumpf in the third paragraph. The correct version follows:) --CFO: "We have less risk than our peers" --CFO: Credit default swaps "now about a quarter of what it was three years ago" --Mortgage chief: Hedging "a critical capability" any bank has to have By Matthias Rieker Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Wells Fargo & Co.'s (WFC) top two executives kicked off their investor day by reassuring Wall Street that Wells Fargo is a more stable and less risky company than other big banks. "You can't take outsized risk in the financial services industry," Chief Financial Officer Timothy Sloan told investors assembled here Tuesday morning, just over a week after J.P. Morgan Chase & Co. (JPM) reported that a bet on credit default swaps went badly wrong. "We have less risk than our peers." Chief Executive John Stumpf said part of Wells Fargo's culture is to be "willing to say, 'I don't understand this, I won't do this'." Wells Fargo, the nation's fourth-largest bank by assets, has taken the kind of risk that the nation's largest bank, J.P. Morgan, did: Hedging certain business through trading products including credit default swaps. And Wells Fargo has gained and lost billions through hedging--but results came in largely as planned to offset gains and losses in the value of mortgage servicing rights. There aren't any macro hedges at Wells Fargo, Chief Risk Officer Mike Loughlin said. "We either buy securities or don't," but don't buy securities and then hedge them. "We do not do any centrally directed portfolio hedges," he said. Asked whether Wells Fargo has something like a chief investment office, the unit responsible for J.P. Morgan's hedging loss, Loughlin simply said, "No." Sloan told investors Tuesday that Wells Fargo had drastically reduced its exposure to credit default swaps over the last three years. "Credit default swaps are in the news," he said, with an eye on J.P. Morgan's estimated $2 billion second-quarter hedging loss. "Three years ago our credit default swaps [were] much too large, and it is now about a quarter of what it was three years ago." Mike Heid, the head of home lending, said that hedging mortgage servicing rights is "a critical capability" any bank has to have. "That said, it's not a trading activity. It is not trading in any shape or form," he added. At Wells Fargo, hedging mortgage servicing rights isn't part of the investment portfolio of the bank, but is done within the mortgage business to keep hedging closer to the underlying assets that are the cause of the change in the value of servicing rights, namely interest rates and mortgage refinancings. Wells Fargo calls the relationship between interest rates and mortgage refinancing, and the value of mortgage servicing rights a "natural hedge." When rates fall, Wells Fargo originates refinance mortgages and the value of servicing rights decline. CFO Sloan, meanwhile, raised the bank's return targets: The goal is now to eventually generate a return on assets of as much as 1.6% once the economy returns to health. At its investor day three years ago, Wells Fargo said it targets an ROA of 1.5%. But in the currently slow growth environment, the ROA will come in toward the middle of the bank's target range of 1.3% to 1.6%, he said. The bank targets returns on equity between 12% and 15%, Sloan said. Treasurer Paul Ackerman said the bank may return between 50% and 65% of its earnings to shareholders in form of share buybacks and dividends and retain the rest for investments in growth, mainly organic, as many heads of Wells Fargo's lines of business outlined in their presentations during the day. The CFO reiterated that the bank needs to bring expenses down to reach a 55% to 59% efficiency ratio--the ratio of how much a company spends for each dollar it earns. "We feel good about" hitting that target, though he didn't explicitly state a timeline. Wells Fargo plans to reach its goal of $11.3 billion of expense in the fourth quarter, down from almost $13 billion in the first quarter. He also reiterated Wells Fargo's appetite to buy businesses, but remained vague about what the bank might acquire next: "We look for good business to buy that we understand," he said. But investors shouldn't count on massive reductions of Wells Fargo's reserve for loan losses to pop up earnings. Chief Risk Officer Loughlin said "it was painful to build them...we don't want to give them away easily." Wells Fargo wants to keep reserves "at very, very high levels." -By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com
